On April 27, 2011, in a 5-4 ruling written by Justice Scalia, the United States Supreme Court held in Concepcion v. AT&T that corporations may, in the fine print of their consumer contracts, prohibit class action/group action arbitrations, and that defrauded consumers cannot challenge such clauses on the grounds of unconscionablility. Note that in Concepcion, the contract in dispute was not a Franchise Agreement; however, the case could have clear implications as more and more attorneys assert that the Franchise Agreement is an adhesion contract.
In his ruling, Justice Scalia states that in February 2002, Vincent and Liza Concepcion entered into an agreement for the sale and servicing of cellular telephones with AT&T Mobility LCC (AT&T). The contract provided for arbitration of all disputes between the parties, but required that claims be brought in the parties' "individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding." App. to Pet. for Cert 61a. The agreement authorized AT&T to make unilateral amendments, which it did to the arbitration provision on several occasions. The version at issue in this case reflects revisions made in December 2006, which the parties agree are controlling.
According to Justice Scalia, the revised agreement provides that customers may initiate dispute proceedings by completing a one-page Notice of Dispute form available on AT&T's website. AT&T may then offer to settle the claim; if it does not, or if the dispute is not resolved within 30 days, the customer may invoke arbitration by filing a separate Demand for Arbitration, also available on AT&T's website. In the event the parties proceed to arbitration, the agreement specifies that AT&T must pay all costs for nonfrivolous claims; that arbitration must take place in the county in which the customer is billed; that, for claims of $10,000 or less, the customer may choose whether the arbitration proceeds in person, by telephone or based only on submissions; that either party may bring a claim in small claims court in lieu of arbitration; and that the arbitrator may award any form of individual relief, including injunctions and, presumably, punitive damages. Moreover, the agreement denies AT&T any ability to seek reimbursement of its attorney's fees, and, in the event that a customer receives an arbitration award greater than AT&T's last written settlement offer, requires AT&T to pay a $7,500 minimum recovery and twice the amount of the claimant's attorney's fees.
The "principal purpose" of the Federal Arbitration Act (FAA), according to the opinion, is to "ensur[e] that private arbitration agreements are enforced according to their terms." Volt, 489 U.S., at 478; see also Stolt-Nielsen S. A. v. Animal Feeds Int'l Corp., 559 U.S. ___, ___ (2010) (slip op., at 17). This purpose is readily apparent from the FAA's text. Section 2 makes arbitration agreements "valid, irrevocable, and enforceable" as written (subject, of course, to the saving clause); §3 requires courts to stay litigation of arbitral claims pending arbitration of those claims "in accordance with the terms of the agreement"; and §4 requires courts to compel arbitration "in accordance with the terms of the agreement" upon the motion of either party to the agreement (assuming that the "making of the arbitration agreement or the failure . . . to perform the same" is not at issue).
Justice Scalia continued, “In light of these provisions, we have held that parties may agree to limit the issues subject to arbitration, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985), to arbitrate according to specific rules, Volt, supra, at 479, and to limit with whom a party will arbitrate its disputes, Stolt-Nielsen, supra, at ___(slip op., at 19).”
The Supreme Court's ruling in Concepcion therefore holds that states are barred by the FAA from voiding an arbitration clause. This U.S. Supreme Court ruling grants companies broad discretion in defining contract terms that bind all parties even when the agreement is a standard adhesion agreement. Concepcion, when applied to franchise agreements, grants franchisors the authority to draft much stronger language even when the agreement is offered as a “take-it or leave-it,” and the franchisee does not or is not offered the opportunity to negotiate specific terms. There is little likelihood that any franchisee could successfully challenge on the ground of unconscionability an arbitration clause which contained a provision against group or class arbitration. Franchisors should contact counsel and sharpen their pencils. If there was ever a time to test the boundaries of the fine print, the time is now!